India’s services trade

– By Anirudh Shingal

India is a services economy. With a value added share of 54.8% in 2019, the services sector accounts for more than half of India’s GDP. On a balance of payments basis, services trade accounted for 30% of India’s total trade in 2019; in terms of value-added, services account for over half of India’s gross exports. While the sector’s importance as an employer has grown over time, rising from a fifth of total employment in 1995 to one-third of the total as of 2019, this share is still well below advanced economies or even South Asia, where the share is nearly 45%. This also has implications for the inclusiveness of services-led development. Services sectors, particularly modern traded services, tend to be large employers of the female workforce, but only 28% of the female workforce in India was employed in the services sector in 2019, which is half the average for ASEAN countries.

Focussing on trade, India’s services exports increased from $117 billion in 2010 to $309 billion in 2022, registering an average annual growth rate of 6% over 2010-2019 before the COVID19 pandemic led to a 5.4% fall in value in 2020 relative to 2019. Even so, India was relatively insulated from this shock as compared to the rest of the world – global services trade reported a 20% year-on-year decline in value during 2020. Moreover, India’s services exports have witnessed a sharp rebound since 2020, reporting year-on-year growth rates of 18.5% and 28.6% in 2021 and 2022, respectively. Notably, India has had a consistent surplus on the services trade account over 2010-2022 and the magnitude of the surplus has only increased over time since 2016 cushioning the country’s growing merchandise trade deficit.

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In fact, amongst the top twenty services trading economies in 2019, India was ranked in the top five in terms of its growth in services trade over 2010-2019 with a growth rate of 6% per annum for services exports and 6.2% percent per annum for services imports. With the exception of Ireland which tops the list in both cases, India’s growth rate is higher than that of other EU Member States, the UK as well as the rest of the Quad (US, Canada and Japan) and even China in the case of services exports. That said, India’s services trade registered doubledigit growth in the two decades preceding the global financial crisis, which made India amongst the top two large services trading economy during that period. The relative loss in steam in India’s services export growth in the last decade means that the country was marginally less services trade intensive (as a share of GDP) in 2019 compared to countries at similar levels of per capita income.

In terms of composition, India’s services exports remain dominated by other business services (36.7% share in 2019, up from 29.6% in 2010) and ICT (31.3% share in 2019, down from 32.4% in 2010), followed by travel and transportation services, which together account for over 90% of India’s services exports. Given that over 80% of India’s services trade is in sectors that are digitally-deliverable, the country’s services exports were relatively insulated from the COVID-19-induced shock. On the import side, transport and other business services followed by travel services have been India’s most important sectors, contributing more than 80% of the country’s total services imports.

The EU and the US are India’s major services trade partners, though the importance of the EU27 both as a destination market and a source of services imports has declined over time. In contrast, the importance of the US has increased, especially as a destination for India’s services exports while the significance of China as a supplier of services imports to India has also intensified (though that of the UK has declined). The ASEAN Member States have maintained their share in both the export and import distributions over time. Meanwhile, Russia remains a relatively small trading partner for India in services.

An analysis of India’s revealed comparative advantage (RCA) points to a number of interesting findings. India’s RCA in exporting services emanates solely from the ICT sector as India displays a relative comparative disadvantage in exports in other services including insurance and financial services, transport and travel services, which have also been badly hit by the pandemic. Notably, India’s ICT sector has been largely driven by private enterprise operating in relatively competitive markets. It is also amongst the most-liberalized sectors in the Indian economy in terms of market access to foreign investment. One interesting difference however emanates from the extent of state intervention, government policy and regulation in these services. Indian IT is said to have flourished primarily on account of the sector being “forgotten” by Indian policy makers and continues to operate without a regulator even now. On the other hand, India has always had a National Telecom Policy especially in the aftermath of the New Industrial Policy 1992 and this sector also has an independent regulator in the form of the Telecom Regulatory Authority of India (TRAI).

Services also contribute significantly to gross exports on a value-added basis. While the sector’s value-added contribution to India’s non-services exports (agriculture and allied, mining & quarrying, manufacturing and utilities) is relatively lower, it accounts for more than 75% of the value-added in Indian exports across all services activities (except hotels and restaurants where the value-added contribution is still around one-half). On the whole, services contribute almost 90% of the value-added in gross exports of both business and total services.

Despite the importance of the services sector and its growing share in India’s international trade, there are significant barriers to services trade in India. According to the OECD’s services trade restrictiveness index (STRI), India had an overall value of 0.37 in 2022, placing it amongst the more services trade restrictive economies in the world. Only Indonesia and Thailand have more restrictive services trade policies than India in the OECD database and India’s major markets (EU, US, UK) and FTA partners (Japan, Korea) are far more liberal. At the sector-level, India displays above-average restrictiveness in several services activities including broadcasting, courier, banking and insurance, professional (accounting, architecture, legal) and transport services (air and rail freight). This is not only a deterrent to trade in these services but given the increasing use of services in all sectors of economic activity, the cost of these barriers impacts the productivity of Indian producers making them uncompetitive in global markets and also impedes the attainment of UN SDGs.